Strong Agriculture Output To Support GDP Growth

The country’s economic growth is expected to remain strong despite sluggishness in the manufacturing sector as a rebound in agricultural output is expected to support overall growth. Growth in the key farm sector, which accounts for nearly 17% of the nation’s GDP, has been a concern for policymakers for the past few quarters. But, healthy monsoon has raised expectations of strong farm output during July-September 2010. In addition, the arrival of fresh crops has helped ease inflation to some extent though the overall price situation still remains worrisome at 8.58% in October. Official GDP data for the second quarter of the current financial year (2010-11) will be released on Tuesday. A quick survey of economists showed the economy probably grew around 8% during this period, with estimates ranging between 7.3% and 8.4%. Most economists said the farm sector will record strong growth during the quarter—ranging from 3.5% to 4%.

While the expected Q2 GDP growth is lower than 8.8% in the first quarter, the forecast is in line with the government’s calculations. Chief economic adviser Kaushik Basu had earlier said the economy would grow at under 8.8% in the second quarter, before gathering steam again in the third quarter.

But for economists, as well as policymakers, industrial production is a concern with growth rate decelerating in recent months. During September, the sector grew by 4.4%. What is even worrisome is the slowdown in imports, which indicates that the growth in raw material and inputs for the manufacturing sector has not been significant. The government is keen on a strong show by the industrial sector, which accounts for around a quarter of the economy, as it is a large employer.

“Investment in the manufacturing sector is not picking up,” said Sujan Hazra, chief economist at Anand Rathi Securities. High inflation, rising interest rates and faltering global economic recovery are factors impacting investments, economists said.

Shubhada Rao, chief economist at Yes Bank, said the second quarter of the 2010-11 fiscal year may see some moderation in non-farm GDP but it will be offset by strong farm output and help the economy clock 8.5% growth. The government expects the domestic demand driven economy to grow by 8.5% in 2010-11.

Consumption—both in urban and rural areas—remains strong. Auto sales, demand for home appliances, telecom subscriber additions and cement production have been on an upswing. “On the consumption front, trends in rural consumption are supported by the Employment Guarantee Act. We see the National Rural Employment Guarantee Act as positive for rural incomes, raising risk-taking abilities for the rural segment,” Rohini Malkani, an economist at Citigroup, said in a research note. Evidence suggests that the government’s rural jobs scheme has helped raise purchasing capacity in villages.

But inflation remains the dominant concern for the Indian economy. RBI has raised interest rates six times this year to check high inflation, but economists say RBI will remain watchful, considering the strong growth momentum and the uncertain global economic scenario.

D K Joshi, chief economist at ratings agency Crisil, said overall growth will remain strong but there are several challenges ahead. Inflation, pace of global economic recovery and debt problems in Europe are the key factors which could impact growth in the months ahead. “If inflation does not come down, monetary policy will remain active and further tightening may impact investments,” Joshi added.

Read more: Strong agriculture output to support GDP growth – The Times of India

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